Campaign finance is a key issue for the quality of democracy. As we noted in a recently-published book of which we are co-authors, and which we had the honor to present in the Hall of Former Presidents of the Legislative Assembly last February 11 (El costo de la Democracia: Ensayos sobre el financiamiento político en América Latina, UNAM, Mexico City, 2015), it is important because of an inescapable fact: While democracy has no price, it does have an operating cost. The use of economic resources is an essential element for democratic competition. More than a pathology of democracy, political financing, when well-regulated, is a normal part of democratic life.

Yet it is undeniable that money is capable of introducing distortions in the democratic process. Its unequal distribution impacts, first, on the real possibilities enjoyed by the parties and the candidates to take their message to the voters. Second, having money gives individuals and social groups a differentiated possibility of participating in elections and exercizing their influence over the candidates through their contributions. This is vital for democracy. When political power is simply a reflection of economic power, the principle of “one person, one vote” loses meaning. Third, fundraising efforts offer obvious opportunities for the articulation of exchanges between donors and those who make decisions on public affairs, or at least for the continual appearance of conflicts of interest. This can be very problematic in the case of Latin America, where there is a risk of money from organized crime penetrating the campaigns.

And so it is not surprising that the issue is on the political agenda in many countries of the region, just as it has been for a long time in Costa Rica. Costa Rica introduced public financing for political parties in 1956, making it the second country in the world to do so, after Uruguay. Nonetheless, the generosity of the government contribution did not avoid a long succession of scandals associated with the issue, a history that includes figures ranging from Robert Vesco and Manuel Antonio Noriega to Carlos Hank González and the illegal donations from the government of Taiwan. 

The wounds left by each of these episodes gave way to worthy yet incomplete regulatory efforts. Most important has been the reform of the Electoral Code approved in 2009, which among many necessary changes prohibited corporate contributions to the political parties. And not only legislative action has made a difference. The Constitutional Chamber of the Supreme Court has also made a difference by lifting bank secrecy on financing, a very important decision that has been pointed to internationally.

Each of these steps has been moving the country in the right direction. This is worth underscoring: At a time when it is so easy to revile the Costa Rican political system, it should be recognized that in terms of political financing the country is, in general, better situated than it was 20 or 30 years ago. All the evidence we have indicates that private contributions today are less important in our campaigns than one generation ago. We can state with great certainty that our parties are financing more than 80% of the cost of their campaigns with the state contribution. That is good news.

However, the current regulatory framework presents problems such as:

a) It continues to be a regulatory system that is somehow upside down: It meticulously keeps tabs on the use of the state contribution by the parties, which does not give rise to conflicts of interest, while it is much less effective when it comes to verifying the truth of the information the parties provide about their private sources of financing, which do have the potential to compromise the autonomy of the political system. Correcting this imbalance, getting the Supreme Electoral Tribunal to prioritize monitoring private financing and to devote more resources to it, would not only be a way to straighten out its priorities, but frankly, all the parties would also breathe a sigh of relief.

b) The system of advances on the state contribution continues to be very limited (only 15% of the subsidy is disbursed before the presidential election and nothing in the case of municipal elections). It is time to admit that eliminating the system whereby the contributions were distributed in advance payments, which existed from 1971 to 1991 (when 50% was disbursed in advances), caused grave prejudice to the political system. The weakness of the advanced disbursement has ended up leaving the parties at the mercy of banks and lenders during the campaigns. Worse still, today the possibility of a party receiving loans during the campaign against its electoral expectations depends entirely on the fickle behavior of the opinion polls. This is unfair and risky, as the OAS electoral observation missions have noted.

c) The legal framework does little to limit parties’ spending on advertising, one of the most effective ways to reduce outlays during campaigns and to bring about fairness in electoral competition, which is one of the most important objectives in improving the current system. One must evaluate the advisability of adopting a system of advertising slots (provided free of charge by those holding concessions for the radio spectrum or purchased by the Supreme Electoral Tribunal and then made available to the parties) as has been done, with a positive outcome, by other democracies in the region such as Argentina, Brazil, Chile, Ecuador, and Mexico.

d) The current regulatory framework has serious vulnerabilities at the local level. Requiring the parties to file a single financial report with the contribution they receive nationwide (the same system that exists for the presidential election) is insufficient when in practice there are 81 local elections in which each candidate raises and spends money autonomously. Let’s be clear: Relatively little is known about who finances the campaigns at the local level in Costa Rica. This would not matter much except that the experience of other countries – from Mexico to Colombia – shows that local campaigns are the preferred point of entry for organized crime to penetrate the electoral structures. Reinforcing the financial controls on municipal elections is one of the country’s most urgent tasks in relation to campaign finance.

Costa Rica has made major strides in regulating political financing. Yet there is an urgent need to address the weaknesses in the current regulatory framework. There are bills in the legislative pipeline, such as No. 18,739, introduced by the Supreme Electoral Tribunal in April 2013, that incorporate almost all the reforms suggested here and that provide an excellent basis for moving this inevitable discussion forward. 

We will have to address the problems in the current regulatory framework sooner or later. The question is whether we will do so before or after the next scandal. Let’s hope that, for once, we act on time.

This piece was originally published by International IDEA. 

Super PACs and other lightly regulated political organizations are dumping hundreds of millions of dollars into American elections. What should be done about it? Unlike many candidates for federal or state office, so-called independent expenditure groups face no restrictions on how much individuals and groups can give to them. And thanks to several federal court decisions, including Citizens United v. Federal Election Commission, independent groups can spend unlimited amounts to influence elections. The public understandably worries about the political clout of wealthy groups—especially since donors often can hide their identities.

Reformers have proposed various remedies: disclosure rules, the appointment of a liberal Supreme Court justice to reverse Citizens United, even a constitutional amendment to overturn that decision. Those long-shot strategies, however, are unlikely to create the kind of small-donor democracy that many reformers seek. Money, like water, will inevitably flow into the political system. Laws can’t do much to reduce the amount of money in politics; what they can change is where the money goes.

An easier path to improving politics

In our new Brookings paper, The State of State Parties, we suggest an easier path to improving politics—one that is right under our nose. Strengthening state political parties can help offset the clout of super PACs.

Our study, based on a survey of 56 state-party organizations plus detailed interviews with 15 of their leaders, points to the distinctive and constructive role that state parties play in American politics. In an era when politics seems to be spinning out of control, party organizations are among the few actors that seek to integrate and balance interests—for instance, by recruiting candidates with broad appeal, by playing honest broker among contending partisan factions, and by building coherent strategies among campaigns up and down the ticket. Party organizations also generate a lot of grassroots activity to mobilize volunteers and voters.

How regulations on parties increase super PAC spending

State parties are among the most heavily regulated entities in American politics, a situation that diminishes their influence relative to non-party groups. For instance, the vast majority of state parties face restrictions on the source and size of donations, and some contribution limits are unrealistically low. In Massachusetts, no donor can give more than annual aggregate of $5,000 to all local and state parties. That’s a paltry sum in statewide elections that can easily cost $55 million, including $20 million in independent expenditures.

Super PACs and other groups naturally fill the vacuum because they do not have to contend with limits on raising and spending money. Often, outside groups effectively drown out the parties. In our survey, only half the parties said they advertise on TV and radio sometimes or often, usually because they lack the resources to do more.

The figure below shows that parties’ independent spending is miniscule compared to the growing expenditures of non-party groups over the past five election cycles. In the 2014 election cycle, the parties accounted for just six percent of total independent spending in the states for which we had good data.

An especially significant finding is that restraints on political parties seem to amplify the activities and influence of outside groups. As illustrated in the table below, 65 percent of respondents in states with contribution limits to parties said that independent groups sponsor more than half or almost all political ads, compared to only 23 percent in states without contribution limits. 

In other words, independent spending is significantly lower when parties are not limited. These differences translate into electoral clout. In states with contribution limits, 65 percent of respondents said independent spending is often a key factor in gubernatorial elections, while fewer than half said the same in states with no limits.

Correlation does not prove causality, but our findings provide strong circumstantial evidence that when you restrict the parties, you get more independent expenditures by non-party groups.

It’s not hard to strengthen state parties

We recommend changes to strengthen state parties and restore them to a place of prominence in campaigns. First, state governments should raise or eliminate contribution limits so the parties can acquire sufficient resources to compete with outside actors. This would allow state parties to serve as clearinghouses for campaign money, which would bring more “dark money” toward accountability and transparency.

Second, parties should be allowed full freedom to coordinate their activities with their candidates and allied groups. This would make them more valuable to candidates and would allow the parties to perform their irreplaceable role of supporting candidates across the party ticket.

We also suggest giving parties favorable tax treatment so that donors are more likely to give to parties than candidate-sponsored super PACs or interest groups. We also recommend other regulatory changes that would encourage parties to do more grassroots work with voters.

Loosening the constraints on state parties would not stop the flow of money into politics (nothing can do that), but would channel more of the money to accountable actors. That’s why we think of this solution as building canals, not dams. And the incremental steps we propose require no sea-changes in public opinion or heroic legislation. In fact, they command support in both parties’ establishments, making them a good starting point for reform. That’s why we conclude that strengthening state parties is a realistic path toward a better balanced, more effective, and more accountable political system.

Researchers from the Brookings Metropolitan Policy Program have released new Earned Income Tax Credit (EITC) data from the IRS on federal individual income tax filers. The interactive data are available for all ZIP codes, cities, counties, metropolitan areas, states, state legislative districts, and congressional districts in the U.S. Users can also find new MetroTax model estimates of the EITC-eligible population in 2012 based on the latest American Community Survey data.

From the 2012 MetroTax model, here are 10 facts about EITC-eligible tax filers

• 71.1 million people live in tax units that are eligible
• 31.1 million children live in eligible households
• 72.8% of eligible filers speak English
• 50.9% are white
• 36.1% received food stamps at some point in the last year
• 25.8% are married filing jointly
• 13.2% have earned a bachelor’s degree or higher
• The median adjusted gross income is $13,638
• 12.7% of eligible filers work in the retail trade industry
• 13.6% work in office and administrative occupations

Read the blog post by Jane Williams and Elizabeth Kneebone to learn more and also visit the EITC interactive.

The Earned Income Tax Credit (EITC) is one of the federal government’s most effective antipoverty policies. In 2012 alone, it lifted about 6.5 million people out of poverty, including roughly 3.3 million children. Designed to incentivize work, the program has been hugely successful in boosting employment rates among poor single mothers. And these accomplishments have led to broad bipartisan support from figures such as Paul Ryan, Greg Mankiw, and Patty Murray.

However, the EITC still falls short of its potential, in large part because it offers little to no support to many of the workers who need it most. As such, it’s encouraging that President Obama chose to make expanding the EITC a priority in his fiscal year 2015 budget. Still, we think there’s opportunity for more robust reforms that further broaden the reach of this important program—at no additional cost to taxpayers.

The president’s plan takes some modest (but important) steps toward strengthening this make-work-pay policy. First, it would increase benefits to workers without children—a subgroup that has historically received very little help from the program. More specifically, the White House would double their maximum credit from about $500 to about $1,000, raise the income level at which their benefits are fully phased out from about $15,000 a year to about $18,000 a year, and loosen the age eligibility restrictions so as to include childless young adults between the ages of 21 and 25. The president also proposes making permanent the benefit expansions for married couples and families with three or more children that were temporarily enacted through the Recovery Act.

This piece is posted in full at the Spotlight on Poverty and Opportunity website »

The Earned Income Tax Credit (EITC) provides a refundable tax credit to lower-income working families. In 2011, the EITC reached 27.9 million tax filers at a total cost of $62.9 billion. Almost 20 percent of tax filers receive the EITC, and the average credit amount is $2,254 (IRS 2013). After expansions to the EITC in the late 1980s through the late 1990s—under Democrat and Republican administrations—the EITC now occupies a central place in the U.S. safety net. Based on the Census Bureau’s 2012 Supplemental Poverty Measure (SPM), the EITC keeps 6.5 million people, including 3.3 million children, out of poverty (Center on Budget and Policy Priorities [CBPP] 2014a). No other tax or transfer program prevents more children from living a life of poverty, and only Social Security keeps more people above poverty.

Since the EITC is only eligible to tax filers who work, the credit’s impact on poverty takes place through encouraging employment by ensuring greater pay after taxes. The empirical research shows that the tax credit translates into sizable and robust increases in employment (Eissa and Liebman 1996; Meyer and Rosenbaum 2000, 2001). Thus, the credit reduces poverty through two channels: the actual credit, and increases in family earnings. This dual feature gives the EITC a unique place in the U.S. safety net; in contrast, many other programs redistribute income while, at least to some degree, discouraging work. Importantly, transferring income while encouraging work makes the EITC an efficient and cost-effective policy for increasing the after-tax income of low-earning Americans. Yet a program of this size and impact could be more equitable in its reach. Under the current design of the EITC, childless earners and families with only one child, for instance, receive disproportionately lower refunds. 

In 2014, families with two children (three or more children) are eligible for a maximum credit of $5,460 ($6,143) compared to $3,305 for families with one child. Married couples, despite their larger family sizes, receive only modestly more-generous EITC benefits compared to single filers. Childless earners benefit little from the EITC, and have a maximum credit of only $496—less than 10 percent of the two-child credit. 

Prominent proposals seek to mitigate these inequalities. President Obama’s fiscal year 2015 budget includes an expansion of the childless EITC, a concept outlined by John Karl Scholz in 2007 in a proposal for The Hamilton Project. Notably, MDRC is currently evaluating Paycheck Plus, a pilot program for an expanded EITC for workers without dependent children, for the New York City Center for Economic Opportunity (MDRC 2014). The recent Hamilton Project proposal for a secondary-earner tax credit addresses the so-called EITC penalty for married couples (Kearney and Turner 2013). And the more generous EITC credit for three or more children was recently enacted as part of the American Recovery and Reinvestment Act of 2009, and is currently scheduled to sunset in 2017. 

Considering this broad set of EITC reforms, and recognizing the demonstrated effectiveness of the program as an antipoverty program with numerous benefits, this policy memo proposes an expansion for the largest group of  EITC recipients: families with one child. In particular, I propose to expand the one-child schedule to be on par with the two-child schedule, in equivalence scale-adjusted terms. An equivalence scale captures the cost of living for a household of a given size (and demographic composition) relative to the cost of living for a reference household of a single adult, and is a standard component in defining poverty thresholds. The proposal expands the maximum credit for one-child families to $4,641, from $3,305 under current law, an increase of about 40 percent. The expansion will lead to a roughly $1,000 increase in after-tax income for taxpayers in the bottom 40 percent of the income distribution receiving the higher credit. As this paper outlines, the expansion is justified on equity and efficiency grounds. This expansion is anchored in the equity principle in that the generosity of the credit should be proportional to the needs of families of differing sizes; I use the equivalence scale implicit in the poverty thresholds of the Census SPM as a guide for household needs. This proposal is also supported by efficiency principles given the EITC’s demonstrated success at raising labor supply among single mothers. 

The target population for the proposal is low-income working families with children. Implementing this proposal requires legislative action by the federal government; it is important to note that altering the EITC schedule requires a simple amendment to the tax code, and not a massive overhaul of our nation’s tax system. The revenue cost of the proposal derives from additional federal costs of the EITC, less the additional payroll and ordinary federal income taxes. The private benefits include increases in after-tax income and reductions in poverty. The proposal would also generate social benefits through the spillover effects that the increase in income plays in improving health and children’s cognitive skills (Dahl and Lochner 2012; Evans and Garthwaite 2014; Hoynes, Miller, and Simon forthcoming).

Downloads

• Building on the Success of the Earned Income Tax Credit - Full Text

British debates about welfare reform have often been influenced by American ideas. The Clinton-era welfare reforms were echoed in some of Tony Blair’s alterations to British benefits. Gordon Brown, as Chancellor, introduced a new Working Tax Credit as a direct result of studying the Earned Income Tax Credit. Brown particularly liked the political advantages of a ‘tax cut for hard-working families’, as opposed to a ‘benefit handout to welfare families’.

But now the transatlantic traffic in ideas on welfare is going the other way. The U.K.’s introduction of a single, unified system of transfer payments – the Universal Credit – is getting quite a bit of attention in the wonkier regions of D.C. politics. Paul Ryan, at a Brookings summit on social mobility, mentioned the Universal Credit (UC) as a possible inspiration for a new round of welfare reform. (Ryan is giving a speech at AEI in a couple of weeks: we’re likely to hear more about his thinking then.) When the architect of the UC, Iain Duncan Smith, visited D.C. recently, he held a series of meetings with leading Republicans to discuss his reforms.

The main attractions of the Universal Credit are fourfold:

1. Simplicity. By unifying five cash benefits and an ‘in kind’ benefit (Housing Benefit) into a single, monthly payment, the complexity of the system from the point of view of the recipient will be greatly reduced.
   
   
2. Cost control. Housing Benefit is paid directly to the landlord, which reduces the tenant’s incentive to control costs.  Add that to the crazily overheated U.K. housing market, and should come as no surprise that Housing Benefit has become a major strain on the system, quintupling in cost in real terms over the last two decades to hit £24 billion a year (c. $41bn), to become the second-biggest element of the U.K.’s system, after pensions.  By including an allowance for housing in the single cash payment in UC, the recipient will be incentivized to control their own housing costs.
    
3. Stronger work incentives. The UC has a flatter ‘taper’ than existing benefits, meaning that cash payments are reduced more slowly as earnings rise. In particular, the UC will allow benefit recipients to work part-time (less than 16 hours a week), and still keep claiming. On the downside, incentives for second earners in two-adult families will be reduced. 
   
   
4. Tighter and more targeted work requirements. The UC will contain stronger requirements to seek work than existing benefits, and importantly, has a ‘sliding scale’ of requirements, depending on the position of the recipient. For example, parents with children under the age of 1 will be exempt from work requirements; those with children aged between  1 and 5 will be obliged to attend for interviews with a case worker to prepare for a return to work; those with children at school will be required to ‘actively seek work’.

Sounds pretty good, doesn't it? And in fact it is, on paper at least. In practice the introduction of UC has been marked with huge overspend and delay on the required new IT system. The whole exercise has also been made much harder by cuts in many of the relevant cash benefits, as well as the introduction of a ‘household cap’ on total welfare receipts. The Universal Credit as an idea has a lot of support. As so often, it has been putting the idea a reality that has been difficult.

What—if anything—can the U.S. take from the UC? Short answer: not much. 

Many of the problems the UC addresses do not really apply in the U.S. Work incentives are already pretty strong in the U.S., thanks to the relative generosity of the EITC, and the relative meanness of out-of-work welfare supports. Also, there are already much stronger work requirements in the U.S. system. Some want to go further, and add work requirements to the receipt of food stamps, for example. But this would not require a major overhaul.  As Melissa Boteach and her colleagues at the Center for American Progress write,“the primary problem that the Universal Credit is supposed to address in the United Kingdom—the lack of incentive for jobless workers to enter the labor force—is far less of an issue in the United States”.

The UC also further centralizes an already highly centralized system, by getting rid of Housing Benefit, which is currently administered by Local Authorities. The U.S. system is much less centralized, with states and cities having a high degree of control over the way TANF and SNAP are administered. It is hard to see how anything like a UC could work in the U.S. at anything higher than State level. A Wisconsin Universal Credit makes sense in a way that a U.S. Universal Credit does not.  But if shifting towards block grants to states is really what this is about (see Marco Rubio’s ‘flex fund’ idea),that’s a whole different debate.

A final point. Simplicity and ease of use for the recipient is a key goal of the UC, and a worthy one. The stress and difficulties faced by low-income families just in applying for assistance is unacceptable in the 21st century. But it is not clear that the whole system has to be upended to achieve this goal. Technology ought to allow a single access point to the system, with the complexity out of sight of the user. 

In the U.K. the Universal Credit has a strong rationale, despite the implementation challenges. In the U.S., it is a solution in search of a problem. 

Ryan’s EITC is pro-mobility… but funding it may not be

Paul Ryan seems to be thinking seriously about the issues of poverty and social mobility. He is a reformer as well as an authentic conservative.

While his willingness to embrace EITC expansion is welcome, his proposed funding methods raise serious questions. Paying for anti-poverty programs by cutting anti-poverty programs runs the risk of being self-defeating. No doubt some of them are not working as intended. But reform is the answer, rather than abolition. Many of these programs help those in the deepest poverty - who in many cases are those least likely to benefit from welfare-to-work policies such as the EITC, according to recent research from the Center for Budget and Policy Priorities and from the National Poverty Center. 

Ryan's package is worthy of serious attention, not least from the perspective of social mobility. It is important, however, not to consider the impact of the EITC expansion alone, but also how - and by whom- it will be paid for. 

In new Urban-Brookings Tax Policy Center analysis of Earned Income Tax Credit (EITC) take-up at the county level, Benjamin Harris, a fellow in Economic Studies, and Research Assistant Lucie Parker use zip-code level data on taxes and demographics to take a "fresh look" at the EITC. "Since its creation in 1975," they write, "the Earned Income Tax Credit has played a major role in the U.S. safety net." Earlier this year, Harris presented EITC take-up using IRS data from 2007. Compare that to the new list of ten counties with the highest share of EITC recipients below:

"The regional variation EITC claiming is stark," Harris and Parker conclude. "The counties with the highest share of taxpayers claiming the EITC are overwhelming located in the Southeast. ... [O]ver half the taxpayers in a large share of counties in Alabama, Georgia, and Mississippi claim the EITC. With few exceptions, almost all counties with high EITC claiming are located in the South. Relative to the South, the Northeast and the Midwest have much lower claiming rates. Moreover, average EITC benefit closely follows the pattern for share of taxpayers taking up the credit: in counties where more taxpayers claim the credit, the credit is larger on the whole."

Visit this U.S. map interactive to get county level data on share of taxpayers claiming EITC as well as average EITC amount, in dollars, per county.

In his state of the union and his budget, the President spoke of the stagnation of middle class incomes. Whatever growth we have had has not been broadly shared.  More than 78% of the growth in GDP between 1979 and 2013 has gone to the top one percent. Even Republicans are beginning to worry about this issue although they have yet to develop concrete proposals to address it.

Slow Growth in Incomes

Middle class incomes were growing slowly before the recession and have actually declined over the past decade.   In addition, according to the New York Times, the proportion of the population with incomes between $35,000 and $100,000 in inflation-adjusted terms fell from 53% in 1967 to 43% in 2013.  During the first four decades this was primarily because more people were moving into higher income groups, but more recently it was because they have moved down the ladder, not up.  One can define the middle class in many different ways or torture the data in various ways, but there is plenty of evidence that we have a problem.

What to Do

The most promising approach is what I call “the second earner solution.”  For many decades now, the labor force participation rate of prime age men has been falling while that of women has been rising.  The entry of so many women into the labor force was the major force propelling whatever growth in middle class incomes occurred up until about 2000. That growth in women’s work has now levelled off.  Getting it back on an upward track would do more than any policy I can think of to help the middle class.

Imagine a household with one earner making the average wage of today’s worker and spending full-time in the job market.  That household will have an income of around $34,000. But if he (or she) has a spouse making a similar amount, the household’s income will double to $68,000. That is why the President’s focus on a second-earner credit of $500, a tripling of the child care tax credit, expanding the Earned Income Tax Credit, and providing paid leave are so important. These policies are all pro-work and research shows they would increase employment.

No Marriage = No Second Earner

One problem, of course, is that fewer and fewer households contain two potential workers.  So it would also help to bring back marriage or at least its first cousin, a stable cohabiting relationship.  My ideas on this front are spelled out in my new book, Generation Unbound. In a nutshell, we need to empower women to not have children before they have found a committed partner with whom to raise children in a stable, two-parent family. Whatever the other benefits of two parents, they have twice as much time and potentially twice as much income.    

Other Needed Responses

Shouldn’t we also worry about the wages or the employment of men?  Of course.  But an increase in, say, the minimum wage or a better collective bargaining environment or more job training will have far smaller effects than “the second earner solution.”  In addition, the decline in male employment is related to still more difficult problems such as high rates of incarceration and the failure of men to take advantage of postsecondary education as much as women have. 

Still the two-earner solution should not be pursued in isolation. In the short-term, a stronger recovery from the recession is needed and in the longer-term, more effective investments in education, research, infrastructure, and in labor market institutions that produce more widely-shared growth, as argued by the Commission on Inclusive Prosperity. But do we really expect families to wait for these long-term policies to pay off?  It could be decades. 

In the meantime, the President’s proposals to make work more appealing to existing or potential second earners deserves more attention.  

April 15 is tax day, but not many Americans will be lining up at the post office or logging onto TurboTax as midnight approaches. Taxpayers who receive refunds often file well ahead of the April 15 deadline. And according to new research, many of those refund dollars are already spent or spoken for.

Early filing is particularly common among taxpayers who claim the Earned Income Tax Credit (EITC), which supplements earnings for low-income workers and their families. EITC recipients often receive substantial refunds, especially in relation to their income. According to new data available through our EITC Interactive, nationwide 26.8 million taxpayers benefited from the EITC for the 2013 tax year, and they claimed a total of $64.7 billion from the credit. Combined with other credits and over-withholding these families received, the average refund for EITC filers topped $4,100 that year. As the accompanying map shows, that amount approached $4,500 or more in many southern states.

I thought of those large refunds while reading a fascinating new book by sociologist Kathryn Edin and her colleagues, titled, It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World. The book provides insights from in-depth interviews with 115 families with children in the Boston area who claimed the EITC. It examines their household budgets and how the families view and use the credit. The authors find that these families rely greatly on their tax refunds to close the gap between the wages they earn and the daily costs of living in an expensive region like Greater Boston. For some, a large tax refund also enabled them to purchase something normally confined to middle-class families, such as a special birthday present for a child or dinner out at a restaurant.

One of the authors’ central findings, however, was that EITC recipients bear a considerable amount of debt—95 percent of the families studied had debt of some kind. The most common (66%) was credit card debt, with the typical family owing nearly $2,000. Considerable shares of families also had utility, car, or student loan debt.

Their indebtedness was not surprising given that wages covered on average only about two-thirds of monthly expenditures. The authors classified one-quarter of families’ refund spending as dedicated to debt/bills, but other ways families  spend the money—such as repairing a car or paying ahead on bills—point to the lack of financial cushion EITC recipients endure throughout the year.

For the families Edin and colleagues studied, the average tax refund represented a staggering three months of earnings. Despite that, the authors report that many families expressed that they preferred the "windfall" versus receipt of payments over several months, partly because the lump sum held out the prospect of helping them save. But one has to wonder if the EITC, now routinely referred to as the nation's most effective anti-poverty policy, best supports families' financial security in this form, as its recipients fall further behind each month.

We should experiment with new ways of delivering EITC recipients' tax refunds that preserve some of its windfall aspect while also periodically delivering portions of the credit throughout the year. A small periodic payment pilot is underway in Chicago, and early findings suggest that advance payments of taxpayers' anticipated EITC helped them meet basic needs, pay off debt, and reduce financial stress relative to similar families not receiving such payments. It’s time to try making the EITC more than an annual boom in a bust-filled financial cycle for low-income families. 

Each year millions of low- to moderate-income Americans supplement their income by claiming the Earned Income Tax Credit (EITC) during tax season. Last year, 1 in 5 taxpayers claimed the credit and earned an average of nearly $2,400.

This tax season, some of those eligible for the EITC may also be able to claim, for the first time, a new credit created by the Affordable Care Act (ACA) to offset the cost of purchasing health insurance for lower-income Americans. It’s called the ACA premium tax credit.

To qualify for the ACA premium tax credit, filers need first to have an annual income that falls between 100 and 400 percent of the federal poverty line (between $11,670 and $46,680 for a single-person household in 2014). Beyond the income requirements, however, filers must also be ineligible for other public or private insurance options like Medicaid or an employer-provided plan.

Why the tax credit overlap matters

Identifying the Americans eligible for both credits is important because it sheds light on how many still need help paying for health insurance even after the ACA extended coverage options.

In a recent study of the EITC-eligible population, Elizabeth Kneebone, Jane R. Williams, and Natalie Holmes estimated what share of EITC-eligible filers might also qualify for the ACA premium tax credit this year.

Below, see a list of the top 10 states with the largest overlap between filers eligible for the EITC and those estimated to qualify for the ACA premium tax credit.* Notably, none of these states has expanded Medicaid coverage to low-income families after the passage of the ACA.

Nationally, an estimated 7.5 million people (4.2 million “tax units”) are likely eligible for both the ACA premium tax credit and the EITC. Nearly 1.3 million of those tax units are from the following ten states.

1. Florida

Overlap: 22.5 percent / 405,924 tax units
State-based exchange? No Expanded Medicaid coverage? No

2. Texas

Overlap: 21.4 percent / 513,061 tax units
State-based exchange? No Expanded Medicaid coverage? No

3. South Dakota

Overlap: 20.5 percent / 15,124 tax units
State-based exchange? No Expanded Medicaid coverage? No

4. Georgia

Overlap: 19.8 percent / 186,020 tax units
State-based exchange? No Expanded Medicaid coverage? No

5. Louisiana

Overlap: 19.6 percent / 86,512 tax units
State-based exchange? No Expanded Medicaid coverage? No

6. Idaho

Overlap: 19.3 percent / 28,855 tax units
State-based exchange? Yes Expanded Medicaid coverage? No

7. Montana

Overlap: 18.9 percent / 18,138 tax units
State-based exchange? No Expanded Medicaid coverage? No

8. Wyoming

Overlap: 18.4 percent / 7,276 tax units
State-based exchange? No Expanded Medicaid coverage? No

9. Utah

Overlap: 18.1 percent / 42,284
State-based exchange? No (Utah runs a small businesses marketplace, but it relies on the federal government for an individual marketplace) Expanded Medicaid coverage? No

10. Oklahoma

Overlap: 18.0% / 63,045 tax units
State-based exchange? No Expanded Medicaid coverage? No

* For the purposes of this list, we measured the overlap in “tax units,” not people. One tax unit equals a single tax return. If a family of four together qualifies for the ACA premium tax credit, they would be counted as one tax unit, not four, since they filed jointly with one tax return.

When California passed its 2016 budget late last month, it joined a growing list of states that have recently adopted or expanded state versions of the federal Earned Income Tax Credit (EITC). First enacted in 1975, the EITC has become one of the country’s most effective antipoverty programs. We estimate that the federal EITC keeps millions of individuals and children out of poverty each year, reducing the national poverty rate by several percentage points. Others have shown how the EITC creates a strong incentive to work and works as a powerful tool for reducing income inequality.

For an unmarried worker with one child in 2015, the federal EITC works like this: Up to her first $9,880 earned, the worker receives a tax credit equal to 34 cents on the dollar, for a maximum credit value of $3,359. The credit is reduced by 16 cents for each dollar earned beginning at $18,110, eventually phasing out at $39,100 in earnings. Phase-in and phase-out rates and ranges depend on a worker’s filing status and number of dependents claimed. Importantly, the EITC is refundable; a filer can still claim any credit in excess of her tax liability, contributing to refunds that can represent double-digit shares of annual income for lower-paid workers.

Of the 26 states and the District of Columbia with their own EITCs, most have structured their programs to mirror the federal EITC, by simply matching some percentage of the federal credit in a given tax year (see map). This year, Massachusetts, New Jersey, and Rhode Island all increased their state EITCs’ matching percentages. In three states, the EITC is non-refundable, making it a less effective incentive for very low-income workers (Maine this year made its credit refundable). California’s EITC joins a couple of others that, while still refundable, vary in the degree to which they mirror the federal credit based on filing status and income.

Through our work maintaining Brookings’ EITC Interactive, we hear regularly from stakeholders around the country engaged in efforts to expand the EITC and increase local participation to strengthen low-income families and communities. Although it is difficult to determine uptake rates locally, there are several factors associated with participation. Self-employed workers are less likely to claim the credit, as are workers with low English proficiency, and those who do not claim any dependents. The availability of tax preparation assistance tends to increase participation rates. For groups who hope to expand access to the EITC in their communities, these considerations are a good place to start.

To be sure, the EITC is not a silver bullet. Because it is explicitly tied to work effort, the credit does not support low-income families who can’t find work. And because states must balance their budgets, many have had difficulty sustaining their EITCs during periods of economic downturn. (Several of the recent state EITC expansions actually represent the restoration of benefits following drastic cuts during the Great Recession.) Additionally, the federal EITC and its state analogues provide only modest support to workers who do not claim any dependents on their tax return. As such, policy makers should consider state EITCs strong complements to other interventions, such as the growing number of increases in the minimum wage occurring in states and cities.

Nevertheless, the EITC remains one of the best tools we have to fight poverty. Despite bipartisan support for the federal EITC, it is unlikely to be expanded anytime soon. In that light, recent state EITC expansions may be helping to create a more responsive, sub-national safety net that better reflects a large and diverse nation where local priorities and needs differ markedly.

One in five tax filers in the United States claims the Earned Income Tax Credit—a refundable federal tax credit targeted to low-income working Americans that has proven to be one of the nation’s most effective anti-poverty policies. Last year, at tax time the average EITC filer claimed just over $2,400 through the credit.

However, the share of filers claiming the EITC and the level of benefits they receive vary widely within and across communities, as shown by the local-level IRS data we post each year on our EITC Interactive data tool. For instance, almost one in three filers in the Memphis metro area claimed the credit (32 percent) in tax year 2013 compared to just 12 percent of filers in metro Boston. Local labor market conditions can affect these numbers, like the incidence and concentration of low-wage jobs or regional differences in cost of living and average wage levels. But the credit itself is also designed to vary across different kinds of filers and families. Maximum credit levels for workers without children are quite small, but they increase considerably for workers with one, two, or three children—boosting the credit’s work incentive and anti-poverty impacts.

For the first time, our EITC Interactive tool now includes data on how EITC receipt varies by the number of children claimed.

According to that data, last tax year workers without qualifying children received an average credit of $281 (Figure 1). Although they made up almost one in four EITC filers, childless workers accounted for just 3 percent of EITC dollars claimed, due to the small size of their credit (Figure 2). In contrast, workers with one child—the largest share of EITC filers (37 percent)—claimed an average credit of $2,316. Workers with two kids accounted for 27 percent of EITC filers, but with an average credit of $3,682 they took home 40 percent of all EITC dollars. Working families with three or more children made up the smallest share of EITC filers last tax year, but claimed the largest credit on average at $4,036.

These data, which are available down to the ZIP code level, offer insights into the ways in which the makeup of the EITC population (and the low-wage workforce more generally) varies across places. Returning to the Memphis and Boston regions, each metro area received more than half a billion dollars through the EITC last year ($517 and $512 million, respectively). However, the number of filers claiming the EITC was much larger in metro Boston (256,456) than in the Memphis metro area (178,241). In part, these numbers reflect the fact that 30 percent of metro Boston’s EITC filers were childless workers. In the Memphis metro area, just 15 percent of EITC filers did not have qualifying children, while 41 percent had one child, 31 percent had two children, and 12 percent had three or more children—higher than Boston’s share of EITC filers with children across the board (37 percent had one child, 24 percent had two children, and 9 percent had three or more children).

For EITC outreach campaigns working to ensure eligible filers claim the EITC at tax time, and for practitioners looking to use tax time to connect low-income workers to financial services and benefits, these numbers give a sense of who lives in their community and how to target their services. For advocates and policymakers, these numbers help shed light on how potential changes to the credit might affect different places.

For instance, the Obama administration, several legislators, and at least one presidential candidate have proposed expanding the EITC for workers without qualifying children to make it a more effective poverty alleviation and work support tool. Every congressional district in the country has childless workers or noncustodial parents who would stand to benefit from that expansion. But that expansion would be particularly important for the more than 240 districts—largely clustered on the coasts and roughly split between Republican and Democratic representatives—with above average shares of childless EITC filers (Map 1).

In contrast, if Congress does not act to make recent expansions to the credit permanent, every district will see a cut in EITC benefits in 2017, when the credit for workers with three or more children is set to disappear. In particular, more than 200 districts with above average shares of EITC filers with three or more kids—this time predominantly Republican districts clustered in the Intermountain West, parts of the Great Plains, and along the Texas border—would be most affected (Map 2). 

In the coming weeks, we will be delving deeper into the impact of proposed and potential changes to the EITC and releasing new resources on the EITC-eligible population and the credit’s anti-poverty impact. In the meantime, these new EITC Interactive data offer an important resource that can help practitioners, policymakers, advocates, and researchers better understand how the EITC affects low-income workers and families and their communities across the country.

After years of irresponsible fiscal management, Puerto Rico has few good options to address its growing debt crisis. But in most tales of bad behavior, there comes a point where continued punishment for past mistakes becomes counterproductive. We're reaching that point on Puerto Rico, and the Barack Obama administration has put forward a sensible new approach. 

(Citigroup, my employer, has various business relationships with Puerto Rico, including serving as underwriter and market maker in various securities. I've had no involvement in those activities, and this column represents my personal views, not those of Citi.)

Puerto Rico's population and its economy are about 10 percent smaller than they were a decade ago. The poverty rate is 45 percent, only about 40 percent of adults are in the labor force, and unemployment is more than 11 percent. 

Given these dire economic indicators, it's not surprising that Puerto Rico has a serious debt problem. At this point, the territory's total liabilities amount to more than 160 percent of the economy, and debt service is projected to be more than a third of government revenue. Over the next five years, the fiscal deficit looks to be $28 billion, and although the Puerto Rican government has proposed aggressive policy actions, these could, at best, only cut the deficit in half. Because the territory's fiscal dynamic is unsustainable, its uninsured debt is selling at discounts of 30 to 70 percent. 

Something has to give. Which brings us to the White House's plan.

The first imperative is to restore economic growth. For this, there are no magic bullets, but one useful strategy is to extend the Earned Income Tax Credit to Puerto Rico. The EITC is one of the most powerful, market-friendly mechanisms for encouraging labor force participation, and its absence in Puerto Rico makes no sense.

The Obama administration also proposes removing an anomaly in the Medicaid system. If Medicaid treated Puerto Rico in the same way as it does the 50 states, the federal government would pay for an estimated 83 percent of its Medicaid costs. But because Medicaid payments to the territory are capped, the federal government has generally paid only 15 to 20 percent. In addition, temporary Medicaid payments enacted as part of the Affordable Care Act are almost exhausted, posing a near-term threat to Puerto Rico's Medicaid program.

Establishing an EITC in Puerto Rico and adjusting the share of Medicaid payments paid by the federal government make sense from a fairness perspective. The EITC piece would encourage work, and the Medicaid component would attenuate fiscal pressure on the island. These steps would, though, come at a cost to the federal budget, probably in the billions of dollars per year. The administration should clarify both the amounts involved and how they would be financed. 

The island's fiscal governance also needs to be strengthened. Its accounting systems have been shoddy, and revenue estimates have been overly rosy. A period of external oversight is appropriate, to improve transparency and budgetary rigor. 

Finally, there's the hard question of what to do about the existing overhang of debt. Write-offs are inevitable; the only question is how to do them in a structured and timely way. We have bankruptcy laws precisely to handle this sort of situation, which would otherwise involve overlapping negotiations with multiple creditors (Puerto Rico has 18 different debt issuers and 20 creditor committees) and probably extended lawsuits. 

At the very least, Congress should extend Chapter 9 bankruptcy laws to Puerto Rico's cities and public corporations. Municipalities in the states enjoy this protection, and there's no reason to treat cities in Puerto Rico differently than those in Florida or Texas. This step would cover about a third of the territory's debt. 

The more controversial question, though, is whether Puerto Rico's government should also have access to bankruptcy protection. State governments do not, but the administration proposes that territories such as Puerto Rico should. 

Bankruptcy would not necessarily mean that less debt would be repaid. So it is not clear that the traditional argument against bankruptcy protection -- that it would raise future borrowing costs -- carries much force. Negotiated write-offs and default would have largely the same effect, but would probably take longer and be messier. Among the options left, the administration's is the least bad. 

The plan requires legislation, and in today's polarized Congress, that's a daunting prospect. But as former Treasury Secretary Tim Geithner once emphasized, in a crisis, "plan beats no plan." the administration has one. Its congressional opponents don't.

Editor's Note: this op-ed originally appeared on Bloomberg View.

This originally appeared in “Insight,” a publication of Grantmakers for Children, Youth, and Families.

For many in the United States, American poverty conjures images of urban blight or remote Appalachian hardship that motivated the War on Poverty in the 1960s. But the geography of poverty in the U.S. has shifted well beyond its historical confines (Kneebone and Berube, 2013). During the first decade of the 2000s, the poor population living in suburbs of the nation’s largest metropolitan areas for the first time outstripped the poor population living in central cities, and poverty continues to grow faster today in the suburbs.¹ This trend has been even more pronounced for those living below twice the federal poverty line—equivalent to $48,500 for a family of four in 2015—which roughly mirrors the population eligible to receive the federal Earned Income Tax Credit (EITC).

Although it was not originally billed as an antipoverty program, in its 40 years, the EITC has become one of the nation’s most effective tools for lifting low-income workers and their families above the poverty line. In 2013 alone, Brookings estimates that the EITC lifted 6.2 million people, including 3.1 million children, out of poverty (Kneebone and Holmes, 2014). What follows is a discussion of the EITC’s growing importance to recipients in light of the new geography of poverty, its role in boosting local economies, and how expanding participation in the program and paying the credit differently could enhance its effectiveness as a local economic stabilizer.

The shifting geography of poverty challenges traditional approaches to combat poverty through investments in place.

When President Johnson declared a War on Poverty in 1964, poverty in the U.S. was primarily urban or rural. This was also the case in 1975 when the EITC was created: Nearly a million more low-income individuals at that time lived in rural areas or big cities than in the suburbs of major metropolitan areas.² Place-based antipoverty interventions dating to the War on Poverty were thus designed with these two geographies—especially cities—in mind. Brookings estimates that today, the federal government spends about $82 billion per year across more than 80 place-focused antipoverty programs, spread across 10 agencies (Kneebone and Berube, 2013). Many are not well-suited to suburban contexts, for several reasons.

First, suburban poverty is more geographically diffuse than urban poverty. Suburban communities tend to be less densely populated than cities and larger in size, and cover more total area. Whereas centralized services might be appropriate in an urban context because they are easily accessible to many in need, it is more difficult to achieve those economies of scale in the suburbs, where residents live farther apart and have limited access to transit. Many competitive federal grant programs allocate points based on population served and population density, implicitly favoring large central cities.

Second, suburban municipalities may lack the experience and administrative capacity needed to sustain services for low-income families and communities. Cities have dealt with poverty longer, and have had more time to develop strategies and structures to support their poor populations. Some of this capacity stemmed explicitly from Community Action Agencies, one of the original War on Poverty programs, which was intended to spur local innovation. Small suburban communities by and large did not have this same experience. Because of their relatively small size, suburban governments may not be able to achieve the administrative scale needed to deliver effective safety-net programs.

Third, many suburban communities lack the economic scale and fiscal structure needed to fund services for low-income residents. Because many small municipalities are limited in how they are permitted to raise revenues—typically through a combination of property and sales taxes—they are especially prone to financial instability caused by the very economic conditions that also generate greater need for services. As poverty suburbanizes, small suburban communities simultaneously face rising demand and falling tax revenues to support those services. Moreover, tax “competition” among many small suburbs within a metro area can further erode the fiscal capacity and political will for these jurisdictions to support people in need.

The new geography of poverty makes direct investments in low-income individuals and families—like the EITC—even more important.

The mismatch between existing place-based antipoverty strategies and the places where poverty is growing fastest heightens the importance of investing directly and effectively in low-income individuals and families through programs such as the EITC. Following its expansion in the mid-1990s, the EITC became the most significant cash transfer program available to low-income working families. The Internal Revenue Service (IRS, 2014) estimates that approximately 79 percent of EITC-eligible taxpayers nationally claim the credit each year—a remarkably strong participation rate among federal safety-net programs.

The high program participation rate and growth over time in EITC expenditures reflects both increases in the credit’s generosity and growing need. In 2000, according to our analysis of IRS Stakeholder Partnerships, Education and Communities (IRS-SPEC) data, total EITC expenditures topped $42 billion (in 2013 dollars). In 2013, they approached $65 billion, equivalent to approximately 80 percent of the amount spent by the federal government on place-based poverty interventions.³

Analysis of IRS-SPEC data further suggests that the EITC’s geographic incidence closely tracks the shifting geography of need. From 2000 to 2013, the number of suburban filers claiming the EITC rose by 62 percent, compared to 33 percent in cities. Changes in the distribution of EITC claims mirrored changes in the location of poor and near-poor populations, particularly growth in the suburbs.⁴ And because lower-income suburban communities (where at least 40 percent of residents are poor or near-poor) are becoming more diverse, too—60 percent of their residents are non-white or Hispanic—the EITC also effectively reduces growing race-based income gaps in suburbs.⁵

EITC dollars support local economies.

The EITC benefits not only low-income families, but also the wider communities in which they live. Although it is widely regarded today as one of the country’s most successful antipoverty programs, the EITC was originally designed to be a temporary economic stimulus measure, in the Tax Reduction Act of 1975 (Nichols and Rothstein, 2015). During the 2000s, more local and state governments made a concerted push to expand participation in the EITC among eligible filers, in part to inject more federal dollars into their local economies (Berube, 2006a).

There are several mechanisms through which the EITC could benefit local economies. California State University researchers categorize the local economic impact of EITC refunds as the sum of direct effects (EITC recipients spending their refunds), indirect effects (business spending in response to EITC recipient spending), and induced effects (changes in household income and spending patterns caused by direct and indirect effects). Together, these effects represent the local “multiplier” effect (Avalos and Alley, 2010). Their estimates for California counties suggest that, in many cases, the credit creates local economic impacts equivalent to at least twice the amount of EITC dollars received.

Direct economic effects result from EITC recipients spending a portion of their refund locally, supporting local businesses and jobs. Consumer surveys show that low-income families spend a relatively large share of their income on groceries and other necessities, which tend to be purchased locally. Analysis of those surveys links tax refund season to increased likelihood of consumer activity as well as larger purchases (Adams, Einav, and Levin, 2009). People spend more, and more frequently, during tax refund season.

The EITC also supports local communities in less obvious ways. The concept of “tax incidence” reflects that the party being taxed, or receiving a tax credit, may not bear its full costs (or reap its benefits) because others shift their behavior in response to the tax. Along these lines, Jesse Rothstein estimates that as much as 36 cents of every dollar of EITC received flows to employers, because by enabling workers to better make ends meet on low wages, the credit effectively lowers the cost of labor. Those lower labor costs may, in turn, allow local employers to hire more local workers (Nichols and Rothstein, 2015).

Finally, emerging evidence suggests that progressive tax expenditures like the EITC can enhance intergenerational income mobility for local children, possibly by counteracting credit constraints that many low-income families face (Chetty, Hendren, Kline, and Saez, 2015). In areas with larger state EITCs, low-income children are more likely to move up the income ladder over time.

The local impact of the EITC depends on how, and how many, eligible filers claim the credit.

The local impact of the EITC also depends on whether eligible workers and families file tax returns and claim the credit. As noted above, the IRS estimates that 79 percent of those eligible to receive the EITC nationally claim it. Given local variation in characteristics associated with uptake, there is likely also considerable local variation in EITC participation (Berube, 2005). Efforts to increase participation locally can thus increase the level of investment communities receive from the program.

Research has identified several factors associated with EITC participation rates among the eligible population. Eligible filers less likely to claim the credit include those who live in rural areas, are self-employed, do not have qualifying children, do not speak English well, are grandparents, or recently changed their filing status (IRS, 2015). One study suggests that communities with moderately sized immigrant populations may exhibit lower EITC participation rates, due perhaps to less robust social networks or more dispersed/heterogeneous populations that may limit awareness of the credit (Berube, 2006b).

Recent research also suggests that EITC participation is higher in areas with more tax preparers, who may promote greater local awareness of the credit (Chetty, Friedman, and Saez, 2012). While individuals who enlist the help of tax preparers are more likely to receive the EITC, they may face significant fees that blunt the credit’s overall impact (Berube, 2006a). Expanding access to volunteer tax preparation services or simple, free online filing could help preserve more of the credit’s value for low-income families and their communities.

To maximize the EITC’s role as a local economic stabilizer, we should consider periodic payment options.

 The EITC already functions as an important antipoverty tool for low-income workers and families, and a boon to local economic stability. Communities should nonetheless be interested in efforts to connect taxpayers to a portion of their EITC throughout the year, rather than only as a lump-sum refund at tax time.

Debt features significantly on the balance sheets of EITC recipients. Recent research finds that about 95 percent of EITC recipients have debt of some kind, and that large shares of refunds are dedicated to debt payments or deferred expenses (such as car repair). Recipients do not use the majority of EITC refunds to pay for monthly expenses, despite the fact that their wages typically cover only two-thirds of those expenses (Halpern-Meekin, Edin, Tach, and Sykes, 2015).

Paying a portion of filers’ anticipated EITC periodically (and directly, rather than through employers like the defunct Advance EITC program) in smaller amounts over the course of a year could help them cope with these spending constraints and avoid taking on debt (Holt, 2008). By enabling families to better keep up with spending on regular items most often purchased locally—rent, food, vehicle maintenance—periodic payments could also support local economies. And by improving families’ liquidity, such payments could reduce reliance on high-cost financial products such as payday loans.

The EITC continues to gain importance as place-based strategies lag behind poverty’s suburbanization, and communities seek ways to maximize public investment in the face of budget constraints at all levels. The program lifts millions of working individuals and families out of poverty each year regardless of their location, and in doing so also supports community financial stability. An expanded EITC—at the federal, state, or local level—with options for periodic payment and better alternatives to high-cost tax preparation could provide even stronger support to low-income families and the places where they live.

References

Adams, W., Einav, L., and Levin, J. (2009). Liquidity constraints and imperfect information in subprime lending. American Economic Review. 99(1), 49–84. Retrieved from http://web.stanford.edu/~jdlevin/Papers/Liquidity.pdf

Avalos, A., and Alley, S. (2010). The economic impact of the Earned Income Tax Credit (EITC) in California. California Journal of Politics and Policy. 2(1). Retrieved from http://escholarship.org/uc/item/2jj0s1dn

Berube, A. (2005). Earned income credit participation—What we (don’t) know. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/metro/eitcparticipation.pdf

Berube, A. (2006a). Using the Earned Income Tax Credit to stimulate local economies. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/~/media/research/files/reports/2006/11/childrenfamilies-berube/berube20061101eitc.pdf

Berube, A. (2006b). ¿Tienes EITC? A study of the Earned Income Tax Credit in immigrant communities, Washington, DC: Brookings Institution. Retrieved from  http://www.brookings.edu/~/media/research/files/reports/2005/4/childrenfamilies-berube02/20050412_tieneseitc.pdf

Chetty, R., Friedman, J., and Saez, E. (2012). Using differences in knowledge across neighborhoods to uncover the impacts of the EITC on earnings (NBER Working Paper Series no. 18232). Retrieved from http://eml.berkeley.edu/~saez/chetty-friedman-saezNBER13EITC.pdf

Chetty, R., Hendren, N., Kline, P., and Saez, E. (2015). The economic impacts of tax expenditures: Evidence from spatial variation across the U.S. Retrieved from http://www.irs.gov/pub/irs-soi/14rptaxexpenditures.pdf

Halpern-Meekin, S., Edin, K., Tach, L., and Sykes, J. (2015). It’s not like I’m poor: How working families make ends meet in a post-welfare world, Oakland, CA: University of California Press.

Holt, S. D. (2008). Periodic payment of the Earned Income Tax Credit. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/research/papers/2008/06/0505-metroraise-supplement-holt

Internal Revenue Service. (2014). Statistics for tax returns with EITC. Retrieved from http://www.eitc.irs.gov/EITC-Central/eitcstats

Internal Revenue Service. (2015). About EITC. Retrieved from http://www.eitc.irs.gov/EITC-Central/abouteitc

Kneebone, E., and Berube, A. (2013). Confronting suburban poverty in America. Washington, DC: Brookings Institution Press.

Kneebone, E., and Holmes, N. Fighting poverty at tax time through the EITC. Retrieved from http://www.brookings.edu/blogs/the-avenue/posts/2014/12/16-poverty-tax-eitc-kneebone-holmes

Nichols, A., and Rothstein, J. (2015). The Earned Income Tax Credit (EITC) (NBER Working Paper Series no. 21211). Retrieved from http://www.nber.org/papers/w21211.pdf

From its modest beginnings in 1975, the Earned Income Tax Credit has grown into one of the nation’s most effective anti-poverty programs. Each year, the EITC supplements low-income workers’ earnings, encouraging work and lifting millions of people out of poverty.¹ It has positive lasting effects for parents, who have shown longer-run earnings increases and better health outcomes. At the same time, their children exhibit a host of benefits, from better school performance and higher rates of college enrollment to more hours worked and higher incomes in adulthood.² 

Moreover, the EITC supports economic stability in communities throughout the country where filers collectively receive millions of dollars in earnings supplements annually.³ These successes stem from a series of targeted expansions—supported by both Republicans and Democrats—over the EITC’s 40-year history, transforming it from a small credit into a significant income supplement for low-income working families.⁴

Yet more can be done to preserve and build on the effectiveness of the EITC, and a growing number of elected officials and policy experts have proposed  strengthening the credit. Three main recommendations have emerged from these proposals.

Preserve two key provisions of the EITC that are set to expire in 2017;

Expand the credit for workers without qualifying children; and

Offer filers options to receive a portion of the credit outside of tax time.

In this brief, we consider the first two recommendations, using our MetroTax model and detailed microdata from the 2014 American Community Survey to estimate the impact of these potential changes on workers and on the metropolitan areas and states where they live.⁵ A new analysis by Steve Holt will take an in-depth look at the issue of periodic payment.

If two key EITC provisions expire in 2017, 7.4 million filers would lose part or all of their EITC.

In 2009, Congress and the Obama administration enacted two targeted, but temporary, expansions to the EITC. The legislation reduced the “penalty” for married couples filing jointly by extending their eligibility for the credit $5,000 beyond that for unmarried filers, and it boosted the credit for families with three or more children (who are more likely to be low-income even when working).

If those provisions expire in 2017, the EITC would shrink for 6.7 million taxpayers, while a little under 700,000 filers would lose eligibility altogether. Two-thirds of filers who would be affected are married couples, 1.8 million of whom are also raising more than two kids (meaning they would be subject to both cuts). The remaining third are unmarried workers with at least three children. Most of these taxpayers (58 percent) have a high school diploma or less, and they are most likely to work in manufacturing, construction, and retail. The typical adjusted gross income of these filers is $28,000 a year, just above the poverty line for a family of four (roughly $24,000 in 2014).

States and metro areas in the Midwest and West would see the steepest cuts if these provisions expire. 

Every state stands to lose millions of dollars if these EITC provisions are not made permanent. States and metro areas with higher-than-average shares of married couples and larger families would be hardest hit. In the Intermountain West, Idaho and Utah could see a 10 percent drop in federal EITC dollars coming into the state (Table 1). The major population centers in those states—including metropolitan Provo and Ogden in Utah and Boise, Idaho—top the list of major metro areas that would experience the biggest cuts if these provisions expire.

While larger states like California and Texas would see their EITC claims drop by smaller percentages, the size of the EITC-eligible population in these states mean that the expiration of these two provisions would translate into a loss of more than half a billion dollars in California ($538 million) and over $400 million in Texas. Taxpayers in the Los Angeles metro area stand to lose an estimated $185 million in EITC receipts, while those in Dallas would forfeit nearly $100 million. (For detailed state and metro data see the appendix.)

Expanding the credit for workers without qualifying children would benefit more than 14.4 million filers. 

The EITC for childless workers is significantly smaller than the credit for families with children. In tax year 2013 (the most recent year for which detailed data are available), workers with qualifying dependents received $2,794 on average through the EITC, compared to the meager $281 claimed by the average childless worker.⁶ In fact, low-wage earning childless adults are the only group of taxpayers actually taxed into (or deeper into) poverty by the federal tax system.⁷

Both President Obama and House Speaker Paul Ryan have proposed expanding the EITC for these workers, as have legislators—including Sen. Patty Murray (D-Wash.), Rep. Richard Neal (D-Mass.), and Rep. Barbara Lee (D-Calif.)—and Republican presidential candidate Jeb Bush.⁸ (Republican presidential candidates Ted Cruz and John Kasich have also called for the EITC to be expanded but have not specified whom that expansion would target.⁹)

The proposals put forward by Obama, Ryan, Lee, and Bush are strikingly similar (although they differ considerably in how they would pay for it). These expansions would double the size of the credit for childless workers and the pace at which the credit phases in and out (Figure 1). They would also lower the minimum age of eligibility from 25 to 21.¹⁰

Together, these changes would boost the value of the credit for 8 million filers and extend eligibility to 6.4 million more taxpayers, increasing EITC dollars for these workers by $6.9 billion.¹¹

The filers who would benefit from these changes are largely unmarried workers (87 percent) who are most likely to be employed in service industries (retail, accommodation and food service, administrative services), health care, and construction. Half of these workers have a high school diploma or less. The typical adjusted gross income for these workers is just $8,300, well below the poverty threshold for individuals and married couples without children (e.g., $12,316 and $15,853, respectively, in 2014).

Several states and large metro areas in the Midwest and Northeast would see the number of childless workers eligible for the EITC more than double if the credit were expanded. 

The District of Columbia and Utah, each of which has above-average shares of the population between 21 and 24, would experience the largest percentage growth in the number of childless workers eligible for the EITC (135 and 134 percent, respectively). However, the bulk of states that would double their pool of eligible filers without qualifying children fall in the Midwest (North Dakota, Iowa, Nebraska, and Wisconsin) and Northeast (Rhode Island, Massachusetts, and Vermont), and tend have higher-than-average shares of one-person households and households without children.

Similarly, while the number of EITC-eligible childless workers in the Provo metro area would more than triple if the credit were expanded, most of the major metro areas that would at least double the number of eligible workers without qualifying children are in the Midwest (e.g., Grand Rapids, Milwaukee, and Toledo) and Northeast (e.g., Bridgeport, Boston, and Springfield) (Map 1).

In this era of partisan gridlock in Washington, it is rare to find a policy with the kind of bipartisan support the EITC has received—a testament to its effectiveness in encouraging work, alleviating poverty, and improving outcomes for workers and their children. By preserving key provisions of the EITC for working families and by making the EITC work better for workers without qualifying children, millions of Americans across the country stand to benefit.

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• State and Metro Data Appendix

Each year, one in five households filing a federal income tax return claims the Earned Income Tax Credit (EITC). Targeted primarily to lower-income workers with children, it is one of many credits and deductions filers take each year on their federal income tax forms. However, unlike typical credits and deductions, the EITC is a refundable credit, meaning that after offsetting what is owed to the government filers receive the remainder of the benefit as a refund.

By supplementing earnings for low- and moderate-income households, the EITC helps bridge the gap between what the labor market provides and what it takes to support a family. It encourages and rewards work and has become one of the nation’s largest and most effective anti-poverty programs. In contrast to other work support and poverty alleviation programs, it achieves this with very little bureaucracy beyond what otherwise exists to administer the tax code.

Although the EITC began in 1975 as a small credit (no more than $400), a number of targeted expansions in subsequent years mean that today the EITC’s assistance can be considerable. In 2015, a single parent with three children working full-time all year at the federal minimum wage ($7.25 an hour) is eligible for a credit of $6,242, a boost of more than 40 percent above her earnings of $15,080 (though combined it still leaves her 12 percent below the federal poverty level).

However, the only way to obtain these substantial benefits is to claim the EITC on the annual federal income tax return. While lump-sum payments have perceived benefits (such as being able to pay off debts, make larger purchases, or force savings), the EITC’s single annual disbursement can present a challenge for the working parent trying to make ends meet throughout the year. It can also be problematic for households wanting to stretch out their refund as an emergency savings reserve.

My 2008 paper, “Periodic Payment of the Earned Income Tax Credit,” proposed an option that would allow a family to receive a portion of the EITC outside of tax time, striking a balance between lump-sum delivery and the need for resources throughout the year. Specifically, half of the credit could be claimed in four payments spread out during the year, while the remaining credit would continue to be paid as part of the tax refund.

Since then, several significant developments have occurred. A little-used option for receiving some of the EITC in each paycheck ended in 2010. In 2014, the federal government initiated a new tax credit advance payment process to subsidize health insurance premiums through monthly disbursement of the Affordable Care Act’s Premium Tax Credit. Other countries providing assistance similar to the EITC have continued to innovate and offer access to benefits during the year. Finally, members of Congress and think tanks have proposed alternatives to a single lump-sum disbursement of the EITC, and others have begun to explore and experiment with alternatives, most notably in Chicago, where a 2014 pilot program made quarterly payments to 343 households.

In light of these developments, this paper reviews the author’s original EITC periodic payment proposal, examines emerging alternatives, and addresses the following key questions:

• What is the demand for periodic payment alternatives?
  
  
• What benefits will accrue from the availability of periodic payment?
  
  
• What risks are associated with periodic payment and how can they be managed?
  
  
• What is the administrative feasibility of periodic payment?

The emerging answers point a way forward for identifying different distribution options that would enhance the EITC’s value to low- and moderate-income working families.

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As the holiday season rolls around each year, it often carries a hefty price tag that can strain family budgets. In a survey of low-income taxpayers using volunteer tax preparation services, three-quarters of respondents listed December as a time of year when it’s hardest to make ends meet. But it’s not the only one. Low-income families go through a constant year-round balancing act of juggling bills, going without, asking family and friends for help, and taking on debt when they fall behind.

Many of these families benefit from the Earned Income Tax Credit, which supplements earnings for low-income workers. The EITC has proven to be one of the nation’s most effective anti-poverty programs, and for some families can represent up to 40 percent of their annual income. For the one in five American households that receive the EITC in their refunds, tax time gives them a chance to catch up financially as they start the New Year. But by summer, many recipients once again find themselves struggling paycheck to paycheck to shore up budget gaps, or scrambling to deal with unforeseen financial shocks, like a car breaking down or an unplanned medical expense.

Providing alternative payment options that deliver the credit outside of tax time would go a long way toward boosting economic stability year round for these families. In his new paper “Periodic payment of the Earned Income Tax Credit revisited,” Steve Holt explores the range of proposals that have emerged in recent years to provide more options for delivering the EITC during the year, and shares some lessons learned from early experiments to test those options.

Most notably, the Center for Economic Progress in Chicago recently completed a year-long pilot which offered 343 households the option of receiving half of their expected EITC in four payments in advance of tax time. The results of the pilot were overwhelmingly positive. Compared to EITC recipients in the control group, participants who received periodic payments missed fewer bills and racked up fewer late fees. They were less likely to resort to payday lenders or have to borrow money from family and friends. And they reported less food insecurity and decreased financial stress throughout the year. What’s more, after completing the pilot, 90 percent of the participants reported a preference for periodic payment over the standard lump sum.

More experimentation needs to be done to determine effective ways to replicate and expand on the advanced-payment pilot in Chicago. And future experimentation should also include pilots that test proposals for deferred savings mechanisms. These options, like CFED’s Rainy Day EITC proposal, would allow EITC filers to put a portion of their credit in a savings account and receive a bonus match as an incentive to save. Though structured differently than advanced payment options, the end goal of deferred savings proposals is the same: providing greater financial stability to low-income families outside of tax time.

A growing share of our economy’s jobs are in the low-wage industries and occupations in which many EITC-eligible taxpayers work (as illustrated by new national, state, and metro data from Brookings MetroTax model on characteristics of the EITC-eligible population). The EITC is an incredibly effective policy tool that helps bridge the gap between what the labor market provides and what it takes to support a family. But we can make the EITC work better for working families by offering alternative payment options that can help promote economic security year round.

The Earned Income Tax Credit (EITC) supports millions of single parents and their children each year. Although the majority of these are single moms, Father’s Day provides a good reminder that single dads are also a significant part of the equation.

Using Brookings’ MetroTax model, we estimate that roughly half (49 percent) of all EITC-eligible tax filers in 2014 filed as head of household—a group that includes many single custodial parents. Of these estimated 13.1 million filers, 8.9 million were women, and 4.2 million were men. These female-headed households included an estimated 14.7 million qualifying children, while their male counterparts included 6 million qualifying children.

Although women head of household filers were more likely to be EITC-eligible (69 percent), male heads of household were not far behind, with an estimated 61 percent eligible to receive the EITC in 2014.

To learn more about the EITC-eligible population, visit Brookings’ EITC data interactive.